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Greek Creditors Make Final Offer

The EU and IMF now must decide whether to accept the deal, negotiator says.

January 23, 2012

Bondholders negotiating a debt swap with Greece have made their “maximum” offer, leaving it to the European Union and International Monetary Fund to decide whether to accept the deal, the negotiator for private creditors said.

Charles Dallara, managing director of the Washington-based Institute of International Finance, said he’s hopeful the EU and IMF will agree to terms for private investor involvement in a rescue of Greece to avert a default and collapse of the economy. Negotiations were unresolved as EU finance ministers prepared to meet in Brussels today.

“The elements now are in place for an historical voluntary PSI deal,” Dallara told Athens-based Antenna TV yesterday. “It’s a question now, really, of the broader reaction of the European official sector and, of course, of the IMF to this proposal.”

European officials and the nation’s private bondholders agreed in October to implement a 50 percent cut in the face value of more than 200 billion euros ($258 billion) of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. The accord is key to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20.

German Chancellor Angela Merkel said today she doesn’t see any need for interim financing for Greece because she expects the country to complete talks for a debt swap on schedule.

“I expect that the negotiations with the private creditors and the new Greece program can be completed simultaneously and soon enough that no new bridge loan whatsoever will be needed,” she said in response to a reporter’s question at a news conference with Belgian Prime Minister Elio di Rupo after the two leaders met in Berlin.

Concern about the progress of talks helped drive Greek two- year yields to an all-time high of 206 percent at 2:47 p.m. in Athens. The yield on Greek benchmark debt maturing in October 2022 fell 36 basis points to 33.79 percent today, after reaching a record 36.14 percent on Dec. 21.

The two sides have struggled to agree on the coupon and maturity of the new bonds, which would determine losses for investors. While Greece and the IIF said on Jan. 21 they had made progress in talks in Athens on the debt swap, the failure to reach a deal before the meeting of EU finance ministers may disappoint investors.

‘Keeps Worsening’

“The longer the Greek debt talks take, the more negative it is,” said Otto Dichtl, a London-based credit analyst for financial companies at Knight Capital Europe Ltd. “The longer it takes, the more demands the official sector makes because the situation keeps worsening in Greece.”

Under the IIF’s proposal, the new 30-year bonds would carry a coupon of about 4.25 percent, leading to a net-present-value loss of approximately 69 percent, said two people with knowledge of the talks, who declined to be identified because the talks are private.

While Greek officials have broadly sided with the IIF on the debt deal, the EU and IMF haven’t yet ratified the proposal, said the people. The creditors may receive a response from EU officials as early as today, one of the people said.

The IMF and Germany are pressing for a coupon in the 3 percent range, the New York Times reported yesterday, citing officials involved in the negotiations.

“We are at a crossroads,” Dallara said. “Either we choose a voluntary debt restructuring. The alternative is to choose the path of default.” He wouldn’t comment on the coupon on the new bonds, saying he was “confident” the offer delivered to Prime Minister Lucas Papademos in Athens on Jan. 20 was “the maximum offer consistent with a voluntary PSI deal.”

Finance Minister Evangelos Venizelos said today Greece is ready to complete the debt swap on time.

“We have a very constructive cooperation with the private sector,” Venizelos told reporters today in Brussels before a meeting with his counterparts in the euro area. “We are ready to finalize the procedure on time.”

Dallara and Jean Lemierre, a special adviser to the chairman of BNP Paribas SA and co-chairman of the creditors’ steering committee negotiating with Greece, left Athens on Jan. 21, though they remained available for telephone talks with the Greek government’s leadership, IIF spokesman Frank Vogl said.

Debt Relief

Questions remain over how the two sides can craft a voluntary deal that will provide the debt relief the Greek government requires while attracting enough participation from bondholders. After two years of wage cuts and tax increases, the Greek economy was expected to shrink about 6 percent last year, according to the latest IMF estimates, compared with a forecast of 3.8 percent made in June.

The government has said it might pass legislation that would compel full participation from private creditors, a decision that would undercut the voluntary nature of any swap.

Venizelos said on Jan. 19 that for the final deal to lead to a sustainable level of debt for the country there must be a 100 percent participation rate.

Hedge funds holding Greek bonds may resist the deal, seeking greater profit by getting paid in full, either by the Greek government or by triggering payouts from insurance contracts known as credit-default swaps. Vega Asset Management LLC resigned from the committee of creditors negotiating the swap last month because the Madrid-based hedge fund refused to accept a net present value loss exceeding 50 percent, according to a Dec. 7 e-mail sent to other panel members, which was obtained by Bloomberg News.

The creditors’ steering committee negotiating the debt swap includes representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA, BNP Paribas, Commerzbank AG, Deutsche Bank AG, Intesa Sanpaolo SpA, ING Groep NV, Allianz SE and Axa SA.

Financial firms on the IIF’s private-creditor investor committee, a larger group of 32 members that includes the smaller steering committee, hold more than 47 billion euros in Greek sovereign debt, according to data compiled by Bloomberg from company reports.

Bloomberg News

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